What is a MERP (Medical Expense Reimbursement Plan)?

MERP definition

A Medical Expense Reimbursement Plan (MERP) is an IRS Section 105 arrangement through which an employer reimburses employees, tax-free, for qualified medical expenses. "MERP" is a general, older term — today, most MERPs are structured as Health Reimbursement Arrangements (HRAs), including ICHRA and QSEHRA.

How a MERP works

What counts as reimbursable is not left to the employer. Section 213(d) of the Internal Revenue Code defines qualified medical expenses — care, treatment, prescriptions, and, where the plan permits it, insurance premiums — and a MERP can only reimburse inside that definition. Reimbursements also have to be substantiated before they are paid: the employee submits proof of the expense, the plan or its administrator reviews it, and only then does the money move. Paying a flat monthly amount with no substantiation is not a MERP at all — it is taxable wages, whatever the employer calls it.

• The employer sets up the plan and decides what it reimburses and how much.
• Employees incur eligible medical expenses (and, for some plans, premiums).
• Employees submit documentation; the employer reimburses tax-free.
• The plan is governed by IRS Section 105 and requires a plan document and substantiation.

MERP vs HRA — what's the difference?

They overlap heavily. "MERP" is the older, broad label for any Section 105 medical-reimbursement plan; "HRA" refers to the specific, modern frameworks (ICHRA, QSEHRA, integrated HRAs) that current regulations define. For most small employers today, choosing a MERP means choosing an ICHRA or QSEHRA.

The Section 105 basis

Every MERP rests on Section 105 of the Internal Revenue Code, the provision that lets employers reimburse medical costs without that money being taxed. So a MERP and a Section 105 plan are essentially the same idea described two ways — and HRAs are the regulated modern form they take.

The forms a MERP takes today

• ICHRA — reimburses individual coverage; any size; no cap.
• QSEHRA — small employers under 50; capped.
• Integrated HRA — pairs with a group plan; reimburses out-of-pocket costs.
• Self-funded Section 105 plans — sometimes used in specific owner or small-group setups.

Who uses a MERP

Small businesses reimbursing employees for individual coverage (via ICHRA or QSEHRA), employers supplementing a group plan with an integrated HRA, and certain owner setups (for example, a Section 105 plan covering a spouse-employee), subject to entity rules. The right structure depends on size, whether you keep a group plan, and your goals.

Staying compliant

A MERP needs a written plan document, nondiscrimination compliance, and substantiation of expenses to keep reimbursements tax-free. A broker or administrator handles this — and in practice sets you up with the specific HRA (ICHRA or QSEHRA) that fits, rather than a generic MERP.

The nondiscrimination piece has teeth. Because a MERP is a self-insured medical reimbursement plan, Section 105(h) applies: it cannot discriminate in favor of highly compensated individuals, either in who is eligible or in what they receive. Fail that test and the highly compensated participants lose the tax exclusion on the discriminatory portion, while the rank-and-file employees keep theirs. This is the rule that catches owner-heavy plan designs, and it is worth having the plan document reviewed against it before the first reimbursement rather than after.

MERPs and the ACA

A medical expense reimbursement plan is a Section 105 concept, and for active employees it must fit within an approved framework — an ICHRA, QSEHRA, or excepted-benefit HRA — to comply with ACA market rules. A standalone MERP that simply reimburses individual premiums for active employees generally is not compliant on its own.

The history explains why the rules look the way they do. Before the ACA, a small employer could simply reimburse employees for individual policies through a standalone Section 105 plan. IRS Notice 2013-54 closed that door: an arrangement paying individual premiums for active employees is a group health plan subject to the ACA market reforms, and a standalone one cannot satisfy them. That left employers with only integrated HRAs until Congress created the QSEHRA in 2016 and the departments issued the 2019 HRA final rules establishing the ICHRA and the excepted-benefit HRA. So a MERP that reimburses individual premiums today is lawful precisely because it takes one of those approved shapes. General information, not tax or legal advice.

The self-employed spouse strategy

One well-known small-business use of a MERP is employing a spouse as a bona fide employee and reimbursing the family's medical expenses through the plan. It can be effective in the right situation, but it carries strict requirements around genuine employment and documentation, so set it up with professional help.

Two limits decide whether that works at all. The spouse must be a bona fide employee — real work, real records, compensation that matches the work — because the arrangement rests on an employment relationship, not a marriage. And entity type matters: the approach is associated with sole proprietorships, while a more-than-2% S corporation shareholder is treated like a partner for fringe-benefit purposes and cannot take Section 105 reimbursements tax-free as an employee. Price the idea with a CPA before building a plan around it.

MERP documentation

Like any HRA, a compliant MERP needs a written plan document, a substantiation process, and retained records. That paperwork is what keeps the reimbursements tax-free and defensible if questioned.